Shedding Light on Interest – From an Economic Perspective
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This study investigates previous literature on the topic of interest and interest rates. Having noted a lack of law and economics approach, this paper conducts a rigorous mathematical inspection through modeling and analyzing how rational agents behave under our contemporary legal system. The statutory rate is applied to a myriad of situations. However, it is fixed at a constant, failing to reflect fluctuations in market conditions, and thus distorting the behavior of agents from the outset. By switching to a variable statutory rate that reflects the market, we can allocate resources more efficiently. Korean law stringently distinguishes “legal interest” from “delay interest”; the legal nature assigned to the former is “unjust enrichment,” while the latter is “compensation for damages”. Since they are different subject-matters, if the plaintiff claims for the wrong type of interest she can lose. The economic nature of interest is “cost of capital,” and does not differ across legal, conceptual categories of interest. Such dogmatic delineation distorts incentives, obstructing private autonomy. This paper proposes acknowledging the duty to request elucidation through case law, and altogether abolishing the distinction through legislation. The significance of this study lies in providing a forensic economics framework regarding interest in Korean law.
Abstract
This study investigates previous literature on the topic of interest and interest rates. Having noted a lack of law and economics approach, this paper conducts a rigorous mathematical inspection through modeling and analyzing how rational agents behave under our contemporary legal system. The statutory rate is applied to a myriad of situations. However, it is fixed at a constant, failing to reflect fluctuations in market conditions, and thus distorting the behavior of agents from the outset. By switching to a variable statutory rate that reflects the market, we can allocate resources more efficiently. Korean law stringently distinguishes “legal interest” from “delay interest”; the legal nature assigned to the former is “unjust enrichment,” while the latter is “compensation for damages”. Since they are different subject-matters, if the plaintiff claims for the wrong type of interest she can lose. The economic nature of interest is “cost of capital,” and does not differ across legal, conceptual categories of interest. Such dogmatic delineation distorts incentives, obstructing private autonomy. This paper proposes acknowledging the duty to request elucidation through case law, and altogether abolishing the distinction through legislation. The significance of this study lies in providing a forensic economics framework regarding interest in Korean law.
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